Turkey finally goes for QE phase in battle against economic disruption

By bne IntelIiNews March 31, 2020

Turkey has finally gone for a quantitative easing (QE) phase in its battle against the economic disruption caused by its already embattled economy coming face to face with the coronavirus (COVID-19) emergency.

The move, announced on March 31, was in line with the expectations of many analysts who felt the Erdogan adminisration had no choice but to bring in QE as an “unorthodox” measure. Other analysts said describing the measure as “unorthodox” was not warranted in the current global environment.

Kunjal Gala, co-portfolio manager at Federated Hermes, told Reuters the measure was in line with moves made by other countries aiming to support their economies going into a global recession. “That’s how you prevent the public health issue becoming a credit issue. If it becomes a full-blown credit crisis then that is a different world we are in, and that is what central banks are trying to prevent,” Gala said.

The QE phase was announced early on March 31 but the Turkish lira (TRY) finished the day 0.8% weaker against the dollar at 6.61, the lowest rate seen since Turkey’s 2018 currency crisis.

The Central Bank of the Republic of Turkey (CBRT) said it would ramp up government debt buying and offer new pools of cheap funding to curb the fallout from the COVID-19 pandemic’s growing impact on the country.

The crisis measures allow primary dealers to, for a temporary period, sell the central bank debt they purchased from Turkey’s Unemployment Insurance Fund, which will be under pressure as jobs disappear and the economy contracts.

The CBRT also extended TRY60bn ($9bn) worth of rediscount credits and added more lending options well below its 9.75% policy rate. It said the moves would lay on much needed credit to companies and liquidity to government debt markets.

The central bank said other outright asset purchases “can be carried out in a front-loaded manner and these limits may be revised depending on the market conditions”.

The objective was to “enhance the effectiveness of the monetary transmission mechanism via increasing the market depth, enabling sound asset pricing and providing banks with flexibility,” it added.

In an additional move, the CBRT stated that it would hold swap auctions with six-month maturities for lira against dollars, euros or gold at an interest rate pegged 125bp lower than the policy rate.

For FX operations, lenders are now permitted to deploy mortgage- and asset-backed securities as collateral.

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